What does it mean to have a strong versus a weak dollar? The answer can be particularly helpful to investors in the stock market. If this debate confuses you, you're not alone. Our economy and stock investors thrive when there is a balance between a strong dollar and a weak dollar. Consumers pay reasonable prices for imported goods and our manufacturers can compete in the global marketplace. The effect a strong or weak dollar has on jobs depends on the company and whether it's domestic or international.
Learn more about the impact of a strong versus weak dollar when it comes to jobs.
- A strong dollar makes imported products such as cars and electronics more affordable .
- U.S. exports suffer because the goods cost more in other countries when the dollar is strong.
- Jobs can be lost in the U.S. when the dollar is strong because of reduced exports.
Understanding the Strong Dollar
Most of the world's major currencies float in value relative to one another. The U.S. dollar is often the standard by which other currencies are measured. A strong dollar means that our currency's exchange rate is favorable, and you can buy more of a foreign county's goods.
Let's say the current exchange rate is 1/1.30 USD/CAD. This means $1 USD will buy $1.30 CAD. If the exchange rate changes to 1/1.40 USD/CAD, that means the U.S. dollar has strengthened and the U.S. dollar can buy more Canadian currency. If the exchange rate changes to 1/1.20 USD/CAD, the U.S. dollar has weakened.
A strong dollar can be good for consumers because imported goods like electronics and cars are cheaper. It also makes it more affordable for international travelers to visit the U.S.
However, the downside is that U.S. companies that sell goods to foreign customers suffer because, relative to a weaker currency, our goods and services cost more. It may mean U.S. producers are at a disadvantage in the global market. The tech sector tends to have the greatest exposure when the dollar is strong. For example, more than 95% of chip maker Qualcomm's sales are outside the U.S.
It can lead to manufacturers moving plants to foreign countries with lower costs to remain competitive. In short, a strong dollar can mean jobs lost in the United States. For example, when the dollar was overvalued in the late 1990s and early 2000s, the manufacturing sector lost 740,000 jobs.
The Meaning of a Weak Dollar
A weak dollar means our currency buys less of a foreign country's goods or services. Prices on imported goods rise. Travelers to the U.S. may need to scale back a vacation because it is more expensive when the dollar is weak. However, a weak dollar also means our exports are more competitive in the global market, perhaps saving U.S. jobs in the process. A weak dollar is also better for emerging markets that need U.S. dollar reserves. They can better afford to purchase U.S. currency.
When a large trading partner like China artificially keeps its currency weak, it hurts the balance of payments, meaning its goods are cheaper than domestically produced products. Though a short-term boon for the consumer, a weak currency of a foreign competitor means U.S. manufacturers have trouble competing.
Conflicts over currency can (and have) led to trade wars where import tariffs are imposed in response to artificially weak currency of major trading partners. Trade wars are generally counterproductive, but sometimes politicians are more concerned with what plays well rather than what it means for the overall economy.
The Bottom Line
Whether a strong or weak dollar is better is complicated, and it often depends on the context.
A stronger dollar means:
- U.S. goods are more expensive in foreign markets.
- Imports are more affordable.
- Global U.S. companies are less competitive.
- Jobs may be lost as companies move out of the U.S. to stay competitive.
A weaker dollar means:
- U.S. goods are less expensive in foreign markets.
- Imports are more expensive.
- Domestic companies compete with imports.
- Global U.S. companies are more competitive.
Stronger or weaker refer to the value of a U.S. dollar compared to foreign currency, but it doesn't mean that stronger is better or that weaker is worse.